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Google profits trounce expectations as mobile-advertising business ramps up

By Brandon Bailey, San Jose Mercury News

Updated:
04/18/2013 05:44:33 PM EDT

A Google sign is seen at a Best Buy electronics store in this photo illustration in Encinitas, California April 11, 2013. (Mike Blake/Reuters)

MOUNTAIN VIEW, Calif. -- Google reported Thursday that its revenues and profits rose in the first quarter, as the Internet giant worked to increase its mobile-advertising business.

Google had net income of $3.35 billion, up 16 percent from a year ago, as gross revenue rose 31 percent to $13.97 billion. Google's revenue after subtracting commissions paid to advertising partners was $11.01 billion.

Revenue was slightly lower than Wall Street expected, but the company beat analyst's profit projections with earnings that amounted to $9.94 a share, or $11.58 a share excluding one-time charges. Analysts were expecting earnings of $8.81 a share, or $10.66 a share after subtracting one-time charges, on revenue of $14.2 billion, according to a poll by Thomson Reuters.

In a sign the company may be making progress in its mobile business, Google reported a 4 percent decline in the average "cost per click" that advertisers pay when someone clicks on an ad. That indicator has been declining during the last six quarters -- as more consumers use mobile devices, where advertisers generally pay lower prices -- but the rate of decline was lower than the 6 percent reported last quarter.

Google was expected to perform well in the quarter, thanks to its long-standing dominance of the Internet search advertising business. It's also been selling more ads of other kinds, including commercial messages on YouTube and display ads that Google places on its partners' websites.

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Like other Internet companies, though, Google has struggled with the challenge of selling ads on mobile devices. While consumers are increasingly using smartphones and tablets to access the Internet, advertisers have been reluctant to pay as much for ads that appear on those smaller screens, compared with traditional web ads that appear on desktop or laptop computer screens.

Google executives have said they're confident that advertisers will lose that reluctance as they see the effectiveness of mobile ads. In February, the company also announced some changes in the auction process that it uses to sell ads, which it hopes will encourage advertisers to incorporate more mobile spots into their campaigns. Among other things, the new system sets prices for tablet ads at the same rates charged for desktops.

Those changes should increase revenue for Google, according to Ken Sena, an Internet analyst for Evercore Partners, although he noted in a report last week that some marketers were unhappy with their options in the new system.

Advertisers are already showing willingness to pay higher rates for ads on tablets, Shaw Wu, an Internet analyst for the Sterne Agee investment firm, added in a note to investors.

While online advertising remains its core business, Google also has been pushing into other sectors, including computer hardware. The company has been working to turn around its Motorola Mobility mobile device business, which has been operating at a loss since Google acquired it for $12.5 billion last year.

In recent months, Google announced it will expand the high-speed Internet network known as Google Fiber in Austin, Texas, and Provo, Utah. This week, it began delivering the first model of its wearable computing device, known as Glass, to software developers who signed up as early customers.

Analysts don't expect Fiber or Glass to make a significant financial contribution this year. But in a report this week, BGC Partners' Colin Gillis called them "exciting new projects" that could represent "meaningful revenue streams over time."

Google also announced some organizational changes in the last quarter, combining the business units for its Android and Chrome software platforms under Senior Vice President Sundar Pichai, and folding its online commerce unit into the advertising operation led by Senior Vice President Susan Wojcicki.

Contact Brandon Bailey at 408-920-5022; follow him at Twitter.com/BrandonBailey

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